ETF vs Stock Arb question.

Discussion in 'Trading' started by TokyoGhetto, Mar 18, 2011.

  1. simple question for anyone who has done stock arb.

    if you are arbing a stock vs an etf, how much of a deviation do you need in order to over come fees and slippage and still make a profit.

    for example if you are arbing BAC vs XLF and the std. deviation equals 2 cents, meaning that when the spread price deviates 2 cents it returns to its mean, is two cents enough to over come slippage and execution costs in the long run?

    can this still be done at home or will co-location be required to stay competetive.

    the way i see it one legs ecn fees cancels out the other legs rebate, and that a 2 cent spread capture over time will give a positive PnL given a 51% edge.

    also how lag dependant is this strat? I dont want to co-locate. And is the edge even present in todays market given the amount of money and firms involved? the way i see it there isn't enough capital in order to remove this edge from the market. Especially if the markets are liquid like the ones mentioned in the example. one firm might be quick on the draw on the first block of shares but they might run out of capital before they can remove the rest of the shares (deviation) giving us small guys enough time to make a quick buck or two by picking up the rest.

    any thoughts?